implementing symmetric treatment of financial contracts in

Brooklyn Journal of Corporate, Financial & Commercial LawVolume 10Issue 1SYMPOSIUM:The Treatment of Financial Contracts in Bankruptcyand Bank Resolution

Article 5

2015

Implementing Symmetric Treatment of FinancialContracts in Bankruptcy and Bank ResolutionEdward J. Janger

John A.E. Pottow

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Recommended CitationEdward J. Janger & John A. Pottow, Implementing Symmetric Treatment of Financial Contracts in Bankruptcy and Bank Resolution, 10Brook. J. Corp. Fin. & Com. L. (2015).Available at: https://brooklynworks.brooklaw.edu/bjcfcl/vol10/iss1/5

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IMPLEMENTING SYMMETRIC TREATMENTOF FINANCIAL CONTRACTS IN

BANKRUPTCY AND BANK RESOLUTION

Edward J. Janger* and John A. E. Pottow**

INTRODUCTIONFinancial contracts come in many forms and serve many functions in

both the financial system and the broader economy. Repos secured by U.S.Treasury securities act as money substitutes and can play an important roleas part of the money supply, while similarly structured repos, secured bymore volatile collateral, may be used as speculative devices or hedges.Swaps can be used to insure against various types of market risk, frominterest rates to oil prices, or they can operate as vehicles for highlyleveraged investments. The parties to these instruments are sometimesmajor financial institutions and, other times, ordinary businesses. Defaultposes differing risks to the financial system depending upon the type ofinstrument and the nature of the parties.1

Under current U.S. law, however, financial contracts receive one ofonly two radically different types of treatment in insolvency depending onthe identity of the insolvent party: banks and systemically importantfinancial institutions (SIFIs) get one treatment; everyone else gets another.2

* David M. Barse Professor, Brooklyn Law School.** John Philip Dawson Collegiate Professor, University of Michigan Law School. The

authors would like to thank Julian Bulaon for excellent research assistance.1. Where the instrument is an important part of the money supply, such as treasury repos,

then protection of liquidity may be crucial. On the other hand, the stable value of the collateral(treasuries) may mean that Nsystemic8 liquidity of such repos will not be threatened by bankruptcy.See Edward R. Morrison, Mark J. Roe & Christopher S. Sontchi, Rolling Back the Repo SafeHarbors, 69 BUS. LAW. 1015, 1017 (2014) (NSafe harbors for . . . repos can be justified ongrounds that have nothing to do with systemic risk management and they are at base sufficientlyliquid and likely to retain fundamental value in a crisis that they pose no real systemic risk.8).Where the instrument is speculative, delay may have an effect on the value of the instrument tothe parties. But since such instruments are not serving as money substitutes, this volatility may notbe a systemic concern.

2. Compare Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, Pub.L. No. 102-242, 105 Stat. 2236 (codified as amended in scattered sections of 12 U.S.C.)(providing resolution procedures for FDIC insured banks), and Dodd-Frank Wall Street Reformand Consumer Protection Act (Dodd-Frank Act), Pub. L. No. 111-203, §§ 201R214, 124 Stat.1376, 1442R1518 (2010) (codified at 12 U.S.C. §§ 5381R5394 (2012)) (providing resolutionprocedures for systemically significant financial institutions), with the Bankruptcy Code, 11 U.S.C.§ 109 (2012) (permitting bankruptcy relief for individual and enterprise debtors); see also FIN.STABILITY BD., KEY ATTRIBUTES OF EFFECTIVE RESOLUTION REGIMES FOR FINANCIALINSTITUTIONS (2014), http://www.fsb.org/wp-content/uploads/r_141015.pdf [hereinafter FIN.STABILITY BD., KEY ATTRIBUTES] (focusing on the failure and resolution of financialinstitutions); INT4L INST. FOR THE UNIFICATION OF PRIVATE LAW [UNIDROIT], PRINCIPLES ONTHE OPERATION OF CLOSE-OUT NETTING PROVISIONS (2013) [hereinafter UNIDROITPRINCIPLES], http://www.unidroit.org/english/principles/netting/netting-principles2013-e.pdf(focusing on insolvency in the ordinary economy).

156 BROOK. J. CORP. FIN. & COM. L. [Vol. 10

More specifically, the Federal Deposit Insurance Corporation (FDIC)resolves banks under the Federal Deposit Insurance CorporationImprovement Act (FDICIA), 3 and, unless an orderly resolution can beaccomplished in bankruptcy, the FDIC also now has authority to resolveSIFIs under Title II of the Dodd-Frank Act.4 Everyone else makes use of theBankruptcy Code.5

These two regimesPNbank resolution8 and Nbankruptcy8Pfocus ontwo different types of systemic risk associated with financial contracts.Bankruptcy focuses on the risk to capital markets if financial contractscannot clear quickly. Bank resolution focuses on bank runsPthe danger ofthe contracts clearing too quickly. Specifically, the Bankruptcy Code seeksto preserve the liquidity of certain instruments by exempting them fromkl0I+(-)Th4* automatic stay and avoidance powers,6 while bank insolvencylaw seeks to preserve asset value of a struggling bank itself by facilitatingorderly transfer of the bank4s financial contracts (and other assets) to asolvent party.

The key practical difference between the regimesPstemming fromthese different orientationsPis their respective treatment of contractualearly-termination rights. Early termination or Iipso facto5 clauses treat thefiling of bankruptcy as a default per se and allow for immediate terminationof a financial contract. They are often accompanied by a Nwalkaway clause8that extinguishes any net payment obligation of the nonbankrupt party.These clauses may preserve the liquidity and value of particular types offinancial instruments for the nonbankrupt party, but they can also worktogether to destroy the value of any Nin the money8 derivative position heldby the debtor. Bankruptcy law gives effect to early termination rights in theinterest of liquidity. Bank insolvency law, by contrast, modifies them in theinterest of value preservation and financial market stability.7

A primary goal of the bank resolution regime is to promote the stabilityof the financial system by preventing bank runs (contagion). Bankinsolvency law thus briefly stays early contractual terminations that wouldotherwise be triggered by the commencement of a receivership. This so-called Nshort stay8 stops a run on, and preserves the value of, )LQ kl0I4*

3. See FDICIA, 12 U.S.C. §§ 1811R1835a.4. See Dodd-Frank Act §§ 201R214, 12 U.S.C. §§ 5381R5394. The Dodd-Frank Act

expresses a preference that SIFIs should be resolved in bankruptcy, but if the FDIC determinesthat such orderly resolution in bankruptcy is impossible, it grants the FDIC the power to use itsNOrderly Liquidation Authority8 to address the SIFI4s insolvency. Significantly, for reasonsdiscussed below, we think it unlikely that large financial firms will be resolvable in bankruptcywithout the statutory revisions we suggest in this Article.

5. See 11 U.S.C. § 109(b).6. See discussion infra notes 46R49.7. Defenders of the bankruptcy safe harbors, discussed immediately below, of course would

say that their liquidity-preserving function also is in the broader service of financial marketstability, which simply underscores the differing perspectives of the two systems toward financialrisk.

2015] Implementing Symmetric Treatment 157

assets for the benefit of )LQ kl0I4* stakeholders and the economy generally(value preservation). Early termination rights, if exercised, might allow acounterparty to escape its obligations on a financial contract that has valueto the debtor. A brief suspension of those rights, however, enables theorderly transfer of the derivatives portfolio to a solvent and creditworthyentity that can then perform the contract. This preserves the financialattributes of the instrument for both parties.8 This process actually has threesteps. First, termination is briefly stayed. Second, the bank4s assets aredivided into Ngood8 and Nbad8 assets. Third, the good assets are transferredin a timely fashion from the failed institution to a solvent one capable ofperforming the contract. 9 Upon transfer, the commencement of thereceivership is no longer a basis for exercising the early termination rightsas the counterparty is assured the benefit of its bargain under the financialcontract.10 Thus, as a practical matter, in bank resolution, and under the

8. See FDICIA, 12 U.S.C. § 1821(e)(9)R(10) (2012) (suspending early termination rightsagainst banks); see also Dodd-Frank Act § 210, 12 U.S.C. § 5390(c)(8)R(9) (2012) (suspendingearly termination rights against SIFIs). Interestingly, when the definition of Nqualified financialcontract8 was expanded in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Actexpressly rendered walkaway clauses unenforceable where the FDIC was involved, but left themin place for ordinary debtors. See Bankruptcy Abuse Prevention and Consumer Protection Act(BAPCPA) of 2005, Pub. L. No. 109-8, § 902, 119 Stat. 23, 159R60 (codified at 12 U.S.C § 1821(2012)).

9. The bad assets are left behind for takeover by the FDIC. For an overview of the FDICresolution process, see FED. DEPOSIT INS. CORP., RESOLUTIONS HANDBOOK 8R14 (2014),https://www.fdic.gov/about/freedom/drr_handbook.pdf [hereinafter RESOLUTIONSHANDBOOK].10. Section 210(c)(10) of the Dodd-Frank Act provides, for example:(B) Certain rights not enforceable(i) ReceivershipA person who is a party to a qualified financial contract with a covered financial companymay not exercise any right that such person has to terminate, liquidate, or net such contractunder paragraph (8)(A) solely by reason of or incidental to the appointment under thissection of the Corporation as receiver for the covered financial company (or the insolvencyor financial condition of the covered financial company for which the Corporation hasbeen appointed as receiver)P(I) until 5:00 p.m. (eastern time) on the business day following the date of theappointment; or(II) after the person has received notice that the contract has been transferred pursuantto paragraph (9)(A).

Codified at 12 U.S.C. § 5390(c)(10). Section 210(c)(16) further provides:

The Corporation, as receiver for a covered financial company . . . shall have the powerto enforce contracts of subsidiaries or affiliates of the covered financial company . . .notwithstanding any contractual right to cause the termination, liquidation, oracceleration of such contracts based solely on the insolvency, financial condition, orreceivership of the covered financial company, if . . . such guaranty or other support andall related assets and liabilities are transferred to and assumed by a bridge financialcompany . . . or . . . the Corporation, as receiver, otherwise provides adequate protectionwith respect to such obligations.

Codified at 12 U.S.C. § 5390(c)(16).


Orderly Liquidation Authority of Dodd-Frank (OLA), early terminationrights are never actually exercised, and a bank run is averted.

In bankruptcy, there is no such short stay. Quite the oppositePthe so-called Nbankruptcy safe harbors8 identify classes of eligible financialinstruments and exempt those instruments from bankruptcy4* automaticstay entirely, thus permitting immediate exercise of early termination rights.These safe harbors consequently permit creditors to do three things thatwould otherwise be prohibited by the automatic stay: (1) terminate thefinancial contract; (2) exercise setoff rights; and (3) sell any of the debtor4sproperty that serves as collateral to secure the contract.11 These rights arecollectively referred to as Ncloseout netting.8 12 Closeout netting may,broadly speaking, help preserve the liquidity of certain types of financialinstruments, but it is inconsistent with the broader goals of Chapter 11 ofthe Bankruptcy Code, such as debtor value maximization and equaltreatment of creditors. Even more troublingly from the perspective ofcoherent regime integration, it is inconsistent with bank resolution4s goalsof stopping bank runs and preserving the value of a failing entity4sderivatives portfolio. For better or worse, however, Congress has enshrinedthe safe harbors in the Bankruptcy Code, giving rise to a marked asymmetrybetween the treatments of financial contracts: suspension of earlytermination rights in bank resolution, yet enthusiastic vindication of thosesame rights in bankruptcy.

The entrenchment of this asymmetry is deep-seated; commentators andinternational institutions alike have endorsed this exceptional treatment offinancial contracts in bankruptcy under the safe harbors. Indeed, this rightto immediate termination under the safe harbors, in the name of liquidity,seems to be cast by many as nearly essential to preserving financial marketstability.13 For example, the value of this right is extolled in the UNIDROITPrinciples on Closeout Netting, as well as in pre-crisis documents, such asthe UNCITRAL Legislative Guide and the pre-revision World Bank ICRStandard C10.4.14

11. See 11 U.S.C. § 362(b)(6)R(7) (2012) (exempting certain setoff rights against financialcontracts from the automatic stay); see also id. §§ 546(e)R(g), 555R556, 559 (exempting certainpayments by debtor on financial contracts from the trustee4s avoidance powers).12. See, e.g., UNIDROIT PRINCIPLES, supra note 2, at 1R2.13. See, e.g., Philipp Paech, The Value of Financial Market Insolvency Safe Harbours, 36

OXFORD J. LEGAL STUD. 1, 28 (2016) (N[S]afe harbours allow for exponentially increased marketliquidity based on the highly efficient use of assets for purposes of collateralisation. Literally anytype of asset, regardless of its legal nature, can now be turned into cash using repo or derivativestransactions.8).14. See, e.g., UNIDROIT PRINCIPLES, supra note 2, para. 5 (NRegulatory authorities (most

recently, the Financial Stability Board and the Cross-border Bank Resolution Group of the BaselCommittee on Banking Supervision) strongly encourage the use of such close-out nettingprovisions (alongside collateral) because of their beneficial effects on the stability of the financialsystem.8); U.N. COMM4N ON INT4L TRADE L., UNCITRAL LEGISLATIVE GUIDE ON INSOLVENCYLAW, recs. 101R07, U.N. Sales No. E.05.V.10 (2005) [hereinafter LEGISLATIVE GUIDE]; see also


We align with a growing chorus of commentators who question theaccuracy of the assertion that closeout netting enhances market stability.15Indeed, recent experience in Lehman Brothers demonstrates that immediatetermination may actually increase, rather than reduce, systemic risk byexacerbating contagion, and, worse yet, make it virtually impossible forfinancial firms to restructure in bankruptcy. While respect of setoff rights isessential to allowing financial counterparties to manage their derivativesexposure /0 l N0Q)8 kl*K*, allowing those rights to be exercisedimmediately can be problematic. NRespect8 /O *Q)/OO +KML)* l0S )LQ Ntiming8of setoff are distinct issues: there is no intrinsic reason that setoff rightsneed to be instantly exercisable to keep systemic risk at a manageable level.Moreover, while immediate termination may well preserve the liquidity ofcertain classes of financial instruments, it does so only by permitting a runon the particular debtor4s assets, which may destroy the debtor and in turnhave its own market-destabilizing effects. Left unprotected by even a briefstay, Lehman could not reorganize, conduct a going concern sale, orpreserve the value of its derivatives portfolio. And the collapse of Lehmancertainly created significant instability in the financial system. Thus, at leastwhere the firm is large enough, the negative systemic effect of allowing arun on the firm may offset any benefit to be gained by allowing earlytermination. Some delay in termination might thus be systemically salutary.

Although many join us in doubting the wisdom of the bankruptcy safeharbors, there is little agreement on what should be done. While someadvocate outright repeal of these statutory provisions, others note that atleast some financial instruments could have their liquidity attributesseriously jeopardized in the absence of some exceptional treatment inbankruptcy.16 This Article accepts, for the purposes of this discussion atleast, that there is a class of financial contracts that require special treatmentin bankruptcy for systemic reasons. Precisely which instruments shouldreceive that special treatment, and for which policy reasons, we leave to

Proposed Revisions to the ICR Standard, WORLD BANK C10.4 (Mar. 17, 2015),http://siteresources.worldbank.org/EXTGILD/Resources/Expert_Group_Working_Draft_As_Of_March_17(Compared_to_Current_Standard).pdf. As discussed in the Symposium Introduction,l0S K0 <+/OQ**/+ V/IlH4* T/0)+Kk()K/0c the World Bank Standard C10.4 was recently revised topermit a short-stay approach.15. For an excellent review of, and addition to, this literature, see Riz Mokal4s contribution to

this symposium. Rizwaan J. Mokal, Liquidity, Systemic Risk, and the Bankruptcy Treatment ofFinancial Contracts, 10 BROOK. J. CORP. FIN. & COM. L. 15 (2015). For further insights, also seeStephen J. Lubben, The Bankruptcy Code Without Safe Harbors, 84 AM. BANKR. L.J. 123 (2010)[hereinafter Lubben, Safe Harbors]; Mark J. Roe, The Derivatives Market1s Payment Priorities asFinancial Crisis Accelerator, 63 STAN. L. REV. 539 (2011).16. For example, )LQ N*lOQ l**Q)*8 SQ*T+KkQS kh #00l \QH-Q+0 and Erik Gerding in their

contribution to this symposium provide an illustration of financial instruments that, if they are tobe cash-HKIQc 2lh 0QQS */2Q +QHKQO O+/2 kl0I+(-)Th4* k+/lS *)lha Anna Gelpern & Erik F.Gerding, Private and Public Ordering in Safe Asset Markets, 10 BROOK. J. CORP. FIN. & COM. L.97 (2015).


another day. Instead, we seek to address two problems with the currentasymmetric treatment of those instruments subject to the bankruptcy safeharbors. First, as Lehman demonstrated, the immediate termination offinancial contracts under the bankruptcy safe harbors makes it virtuallyimpossible to resolve financial institutions in bankruptcy; and second, asone of us developed more fully in a previous article, the asymmetry itselfcreates a variety of arbitrage opportunities and is therefore problematic inits own right.17

We therefore explore how best to implement a symmetric N*L/+) *)lh8approach that harmonizes the bank resolution and bankruptcy regimes. Inchoosing the short stay regime of bank resolution over the bankruptcy N*lOQLl+k/+8 approach as the model for harmonization, we observe that the moreorderly bank/SIFI approach has allowed for greater asset value preservationin banking cases than the immediate termination rule in bankruptcy.18Wealso note that the financial markets have, for years, tolerated the short stayof the bank resolution regime without apparent catastrophe to financialmarket liquidity.19

Our goal in advocating this symmetric approach is modest: to offer atechnical roadmap toward a treatment of financial contracts in bankruptcythat is symmetric to their treatment under bank insolvency law andworkable in the enterprise context. In doing so, we seek to respond to twospecific critiques: (1) that any stay in bankruptcy is too long and will haveunacceptable systemic risk consequences; and (2) that two days is too shortto accomplish an orderly transfer of a derivative portfolio in a case wherethe debtor is not a bank. While these concerns are important, we think theycan be addressed. The key, we contend, to the successful transplant of thebank resolution law short stay into bankruptcy is adequate assurance offuture performance of the financial contract portfolio (which can beaccomplished through the use of so-TlHHQS Ndebtor-in-possession8 /+ NpZ<8financing as a financial backstop).

This Article proceeds in three steps. Part I contrasts the bank insolvencytreatment of financial contracts with the approach in bankruptcy and notesthat the bank resolution regime appears better tailored to preserve the valueof these contracts while minimizing disruption to the financial system. PartII explores how the bank resolution approach could be replicated in

17. See Edward J. Janger, Arbitraging Systemic Risk: System Definition, Risk Definition,Systemic Interaction, and the Problem of Asymmetric Treatment, 92 TEXAS L. REV. SEE ALSO 217,223 (2014).18. See Mark Roe & Stephen Adams, Restructuring Failed Financial Firms in Bankruptcy:

Learning from Lehman, 32 YALE J. ON REG. (forthcoming 2015) (on file with authors) (NAlvarez& Marsal, Lehman4s restructuring advisor, estimated that the disorderly close-outs of Lehman4sderivative portfolio caused the Lehman estate to lose at least $50 billion in portfolio value, andmaybe more.8).19. The one-day stay of FDICIA, 12 U.S.C. § 1821(e)(8)(G)(ii) (2012), has been in effect

since 1991 and has not yet caused a market collapse even though numerous banks have failed.


bankruptcy, identifying the changes that would be necessary to current law,both to preserve value and to protect the legitimate expectations ofnonbankrupt counterparties (i.e., assuring derivative counterparties thebenefit of their bargain while preventing opportunistic breach). Finally, PartIII briefly explores whether the same approach could be used, in appropriatecircumstances, to allow financial contracts to be assumed and performed bythe debtor itself. The Article concludes by detailing the relatively modestset of changes to current bankruptcy law that would be required toimplement symmetric treatment of financial contracts in bankruptcy andbank resolution.

I. ASYMMETRIC TREATMENT OF FINANCIAL CONTRACTS #CONTRASTING BANK RESOLUTIONWITH BANKRUPTCY

A. THEMECHANICS OF THE BANKRESOLUTIONREGIMEBanks hold financial contracts and derivatives in their portfolios in the

form of options, swaps, repos, credit default agreements, and so on. Thesecontracts are sometimes held as assets on a bank4s books as a moneysubstitute and are sometimes used as hedges to balance other risks in thebank4s portfolio. These contracts all share a common NQl+Hh )Q+2K0l)K/0c8 /+NK-*/ OlT)/8 -+/'Ksion, under which, upon the bankruptcy of either party,the non-bankrupt counterparty can do three things: immediately terminatethe otherwise unexpired contract; liquidate any collateral securing theobligation; and setoff any other outstanding contracts with the insolventparty to yield a net position.20 As explained above, these rights are oftenreferred to collectively as Ncloseout netting.821

Bank insolvency law seeks to minimize the systemic effects of bankfailures by preventing bank runs. As such, it recognizes that the immediateexercise of early termination rights by the counterparties of an insolventbank might exacerbate the systemic effect of bank insolvency in severalways. Cash leaves the bank when parties exercise their rights to exitthrough closeout netting. If these rights are exercised en masse uponinsolvency, the asset-depletion effect is the same as a bank run. In fact, itprobably increases the likelihood of a traditional bank run as news of thefailure of the bank leaks out. Moreover, if the bank is big and

20. These so-called Nwalkaway8 rights are not specifically addressed by the Bankruptcy Code,but are explicitly covered by the one-day stay of the bank resolution process. See AM. BANKR.INST., FINAL REPORT OF THE ABI COMMISSION TO STUDY THE REFORM OF CHAPTER 11, at 106(2014) [hereinafter ABI COMMISSION REPORT].21. See UNIDROIT PRINCIPLES, supra note 2, at 1R2 (using the term Ncloseout netting8 to

describe any mechanism that gives rise to netting rights, whether automatically or by declaration,upon the occurrence of a predefined event). Note, however, that there is nothing unusual aboutthese early termination rights. Almost every contract contains a so-called Nipso facto8 clause in theboilerplate. The difference is that for all other contracts, the Bankruptcy Code makes those clausesunenforceable. See 11 U.S.C. §§ 541(c), 365(c) (2012).


interconnected with many other market participants, the effect of a singlefailure can become systemic.

To address these concerns of rapid financial asset collapse, the FDICdeveloped a method for preserving the integrity of a bank4s financialcontract portfolio while cushioning the effects of a single institution4sfailure on the banking system.22 The technique is familiar. When a bankfails, the FDIC shuts it down,23 usually on Friday, and over the course ofthe weekend the bank4s assets are identified as either Ngood8 or Nbad.8 Thegood assets are transferred by sale to a solvent counterparty (usuallyanother bank),24 while the bad assets are held by the bank4s governmentreceiver.25 During the short period of transitionPeither the weekend, or theweekend plus one to two business daysPearly termination rights aresuspended.26 Then, if the contracts are transferred to a solvent counterpartybefore the stay expires, the termination rights remain in abeyance so long asthe counterparty performs its obligations under the contract.27 A run isthereby prevented, and valuable financial contracts are preserved. Thissame approach was extended beyond banks to cover SIFIs under Title II ofthe Dodd-Frank Act with the creation of the OLA.28 Extending the bankresolution approach to SIFIs was not just an endorsement of the efficacy ofwinding up failed banks while preserving financial contract value, but alsoa recognition that the regulatory restriction of this regime to banks alonewas under-inclusive.

To be sure, the FDIC approach necessarily delays the exercise of earlytermination rights by some counterparties, but the result is that the value ofthe bank4s portfolio is protected, the nondebtor counterparty receives thebenefit of its bargain, and both the integrity of the banking system and thestability of financial markets are preserved.29 Moreover, experience has

22. See Michael H. Krimminger, Adjusting the Rules: What Bankruptcy Reform Will Mean forFinancial Market Contracts, FED. DEPOSIT INS. CORP. (Oct. 11, 2005),https://www.fdic.gov/bank/analytical/fyi/2005/101105fyi.html (NThe FDIC4s power to transfer[financial contracts] to another open bank or to an FDIC-owned bridge bank within a business dayafter appointment of the FDIC as receiver allows the FDIC the flexibility to choose a resolutionstrategy that may retain the value in a portfolio of [financial contracts] or maximize its valuethrough more gradual sale. In addition, a transfer of [financial contracts] to another bank or to abridge bank also may avoid the potential market disruption that could result from an immediateliquidation of a large portfolio.8).23. FDICIA, 12 U.S.C. § 1821(c)(4)R(5).24. Id. § 1821(n).25. Id. § 1821(m).26. Id. § 1821(e)(10)(B)(i).27. Id. § 1821(e)(10)(B)(ii).28. Dodd-Frank Act, Pub. L. No. 111-203, § 210, 124 Stat. 1376, 1460R1514 (2010) (codified

at 12 U.S.C. § 5381R5394 (2012)). Specifically, the stay is codified at 12 U.S.C. § 5390(c)(8)R(9).29. Mark Roe and Stephen Adams have advocated for the implementation of a ten-day stay

(with judicial discretion to extend for another ten days) as a means to protect the value of thedebtor4s derivatives portfolio while simultaneously protecting the stability of the financial markets.See Roe & Adams, supra note 18. We are sympathetic to this in principle but worry that for some


shown that derivatives markets are not, and have not been, significantlydisrupted by the short stay that goes into effect when a bank fails. Thus, thecosts of the temporary delay appear to be offset by the benefit of preservinga valuable portfolio of good contracts.30

B. THE BANKRUPTCY SAFEHARBORAPPROACH

1. The Safe Harbors and Their JustificationWhen financial contracts are held by entities that are neither banks nor

SIFIs, the Bankruptcy Code governs, with an approach that is quitedifferent from both the bank insolvency regime and bankruptcy4* /j0treatment of ordinary contracts.

a. Ordinary Executory ContractsFor ordinary contracts, the Bankruptcy Code mirrors the bank

insolvency approach: there is no early termination because ipso factoclauses are invalidated by statutory command,31 and any right to terminatethe contract, even if triggered before bankruptcy, is suspended by theautomatic stay until the debtor can decide whether to perform (assume) orbreach (reject) the contract.32 If the debtor decides to reject the contract, thecosts of breach are treated as a pre-petition claim entitled to the same prorata distribution as any other unsecured claim against the estate.33 This rightof the debtor to assume or reject a contract preserves valuable contracts forthe benefit of the estate, and the treatment of rejection as an unsecuredclaim for breach damages equitably allocates the loss caused by defaultwith other pre-petition creditors.34 However, this creates a Nlimbo8 period,while the debtor decides whether to assume or reject, during which thenondebtor is uncertain of its treatment. The principal difference between thetreatment of ordinary contracts and financial contracts in bank insolvencylaw is the potential length of the stay and the uncertainty that it creates.

The limbo period understandably frustrates counterparties to manytypes of contracts. So, too, does the power of the debtor to cherry pickPtopick and choose which contracts it will perform. Accordingly, theBankruptcy Code contains a number of exceptions and safeguards to protectvarious types of contracts where a delay in assumption or rejection would

instruments a longer stay may be disruptive and, for reasons discussed below, judicial discretionto extend the stay may limit the market stabilization effect of this approach.30. In sum, this Article assumes that the value to be preserved by preventing intemperate

destruction of financial contracts offsets the costs of clearance delay on the particular instruments.31. 11 U.S.C. § 365(e) (2012).32. Id. § 365(a)R(d).33. Id. § 365(g).34. For a deeper discussion, see Jay L. Westbrook, A Functional Analysis of Executory

Contracts, 74 MINN. L. REV. 227 (1989).


cause a particular hardship. Commercial leases are an example of contractsfor which the debtor cannot just freely hoard the assumption option withoutpaying rent.35 The debtor must continue to perform in a Ntimely8 fashion ifit wants to preserve the lease; otherwise, automatic rejection provisionscome into play.36 Other contracts can be assumed by the debtor, but notassigned to third parties, such as personal services contracts, where the factthat the debtor will perform the contract itself is an essential part of thedeal.37 Still other types of contracts cannot even be assumed. Contracts tolend money (financial accommodations) are an example, under the theorythat to force a lender to honor a pre-petition contract to lend money to abankrupt borrower would be perverse.38Most importantly, however, in allcases where a contract can be assumed and/or assigned by the debtor, thecounterparty is entitled to the benefit of its bargain. Specifically, the debtormust cure any breach and give adequate assurance of future performance.39

b. Financial Contracts and the Safe HarborsFinancial contracts are perhaps the most extreme example of contracts

entitled to special treatment. Under the safe harbors of 11 U.S.C. §362(h)(6), (7), (17), and 11 U.S.C. §§ 555 and 556, financial contracts maynot be assumed or assigned. More importantly, early termination rights areneither suspended by the automatic stay nor Nundone8 by the ipso-facto-clause invalidation power. Quite the opposite, closeout netting is permittedunfettered by judicial intervention. Moreover, payments made in connectionwith the closeout of these contracts are insulated from later avoidance underBankruptcy Code provisions designed to reverse certain pre-bankruptcytransactions (unless they are the product of intentional fraud).40

The bankruptcy safe harbors, first added to the Bankruptcy Code in1982 and expanded through 2005, 41 were thought necessary to addresspotential systemic effects of the failure of a smallPor at least notsystemically significantPfinancial firm.42 The legislative history reflectsconcern that the bankruptcy stay might disrupt the clearance of trades and

35. 11 U.S.C. § 365(d).36. Id.37. Id. § 365(c).38. Id.39. Id. § 365(b)(1), (f)(2).40. Id. § 546(e)R(g).41. With the 1982 amendments, Congress expanded the safe harbors to include the liquidation

of derivatives contracts. Stockbroker-Commodity Broker Amendments to the Bankruptcy Code,Pub. L. No. 97-222, 96 Stat. 235 (1982) (amending 11 U.S.C. § 362(b)(6) and adding §§ 555R556).With the passage of BAPCPA, Congress continued this expansion by broadening the definitionsof certain financial instruments covered by the safe harbors, such as, Nsecurities contract,8Ncommodities contract,8 Nforward contract,8 Nrepurchase agreement,8 and Nswap agreement.8 SeeBAPCPA § 907, 11 U.S.C. §§ 101(25), (53B), 741(7), 761(4).42. In 1982, the types of contracts involved would only have been handled by a financial firm,

though later expansion of the scope of the safe harbors likely changed that.


payments under derivatives and thereby render certain financial productmarkets unstable.43 Specifically, there was perceived risk to the financialsystem if trades or payments, clearing through a failed financialintermediary, were stayed. This delay in clearance (clearance risk) couldendanger the stability of the affected product markets.44 For this reason, safeharbors were first added to the Bankruptcy Code in 1982 for transactionsthat were part of the securities clearance process itself and for certaininstruments that function as money substitutes.45 More transactions wereincluded in the scope of the safe harbors in 1984 and 1994, with asignificant expansion in the 2005 amendments to the Bankruptcy Code.46Each time, the justification (however attenuated it became) was the same:reduction of systemic risk.47

Early termination and closeout netting are thought to serve an importantfunction in capital markets. Financial institutions may have a wide varietyof contracts with a particular counterparty, some of which are assets andsome liabilities depending on whether the instrument is in or out of themoney at any given moment. The exposure on and variability of any singlecontract may be great, but when all the various contracts with a singlecounterparty are netted, the exposure will usually be much smaller as thegains and losses on individual contracts cancel out. This ability to net isthought to reduce the amount of risk in the economy and concomitantly

43. See Stockbroker-Commodity Broker Amendments to the Bankruptcy Code, Pub. L. No.97-222, 96 Stat. 235 (1982). See also In re Grafton Partners, 321 B.R. 527, 532R33 (B.A.P. 9thCir. 2005) (Klein, J.) (NPublic Law 97-222 was a package of amendments designed to protect thecarefully-regulated mechanisms for clearing trades in securities and commodities in the publicmarkets from [the] dysfunction that could result from the automatic stay and from certain trusteeavoiding powers.8).44. H.R. REP. NO. 97-420, at 1R2 (1982), quoted in In re Grafton Partners, 321 B.R. at 536.

The House Report states:

The commodities and securities markets operate through a complex system of accounts andguarantees. Because of the structure of the clearing systems in these industries and thesometimes volatile nature [of] the markets, certain protections are necessary to prevent theinsolvency of one commodity or security firm from spreading to other firms and possiblythreatening the collapse of the affected market. The Bankruptcy Code now expresslyprovides certain protections to the commodities market to protect against such a Nrippleeffect.8 One of the market protections presently contained in the Bankruptcy Code, forexample, prevents a trustee in bankruptcy from avoiding or setting aside, as a preferentialtransfer, margin payments made to a commodity broker.

Id.45. See In re Grafton Partners, 321 B.R. at 536 n.17 (summarizing legislative history of 1982

amendments to the Bankruptcy Code).46. BAPCPA § 907, 11 U.S.C. §§ 101(25), (53B), 741(7), 761(4).47. See 11 U.S.C. §§ 362(b)(6), (7), (17), (27), 546(e)R(g), 555R556, 559R561. For a more

complete discussion of the legislative history of the safe harbor expansion, see Charles Mooney,The Bankruptcy Code1s Safe Harbors for Settlement Payments and Securities Contracts: When IsSafe Too Safe?, 49 TEX. INT4L L.J. 243, 247R52 (2014).


increase the ability of financial institutions to lend. Early termination, thus,reduces risk in the financial system by allowing such netting.48

2. The Costs of the Safe Harbor ApproachThe price of this protection for financial market liquidity is the probable

failure of the debtor-firm.49 Any filer with substantial derivatives exposureis likely to be subjected to a run on its implicated assets, unprotected by theautomatic stay. Early termination is thus frequently a death sentence ascounterparties flee, especially if their contracts are in the money or containa walkaway clause.50 Because of the safe harbors, bankruptcy4s protectivestay cannot halt the exodus. The justification for inflicting this cost on thedebtor is that the counterparties get paid and, hence, can continue to managetheir own derivatives portfolio as a net exposure. On the other hand, thisprivileged treatment of financial counterparties increases the risk toeveryone else with a stake in the debtor by reallocating value away from theunprivileged creditors and reducing any possibility of rescue. The implicitpremise of the Bankruptcy Code4s safe harbors is that this cost is tolerableif the failing firm is not itself systemically important. In the case of SIFIs,Dodd-Frank swoops in and the bank resolution regime applies as a backstop.Reorganization of financial firms is therefore functionally impossible inbankruptcy, and reorganization of nonfinancial firms with significantderivatives exposure also may be endangered. Congress appears to havemade a policy decision that the otherwise rehabilitative goals of theBankruptcy Code have to take a back seat to preserving the liquidity of thefinancial markets. These firms are collateral damage.

The Lehman bankruptcy showed the dark side to this approach. On theeve of its bankruptcy, Lehman asked to be converted into a bank holdingcompany.51 It did this in part because it would have allowed access to theFederal Reserve window for desperately needed financing. 52 Timothy

48. David Mengle, The Importance of Close-Out Netting 1R3 (Int4l Swaps & DerivativesAss4n, Research Notes No. 1, 2010). For a contrary analysis suggesting closeout netting maymagnify risk, see Mokal, supra note 15.49. See Roe, supra note 15, at 553 (NPrior to its collapse, Lehman owed J.P. Morgan about $20

billion. Four days before Lehman4s bankruptcy, J.P. Morgan froze $17 billion of Lehman cash andsecurities that J.P. Morgan held, and then demanded $5 billion more in collateral. . . . Because ofthe exception from the Code4s automatic stay . . . J.P. Morgan could immediately liquidate thecollateral in Lehman4s bankruptcy.8).50. Under a walkaway clause, an Nout of the money8 counterpart is excused from any payment

obligations at the time of termination. See ABI COMMISSION REPORT, supra note 20, at 106.51. Joe Nocera, Lehman Had to Die So Global Finance Could Live, N.Y. TIMES (Sept. 11,

2009), www.nytimes.com/2009/09/12/business/12nocera.html?pagewanted=all&_r=0.52. See Frequently Asked Questions M Discount Window Lending Programs, FED. RES.

DISCOUNT WINDOW, https://www.frbdiscountwindow.org/en/Frequently_Asked_Questions.aspx(last visited Feb. 2, 2016).


Geithner rejected this request.53 This refusal meant Lehman had to usebankruptcy. Since Lehman was subject to the bankruptcy safe harbors,closeout of its financial contracts was not stayed. The concomitant bank runresulting from the exercise of early termination rights by counterparties ledto a significant reduction in the value of Lehman4s derivatives portfolio.Lehman is now gone.54 By contrast, immediately after the Lehman failure,Morgan Stanley and Goldman Sachs became bank holding companies and,with financing from various sources, survived.55 In sum, because Lehmanwas forced to use traditional bankruptcy, the safe harbors prevented theorderly transfer of its derivatives book.56 Had it been governed by FDIC-like provisions, a better outcome might have been achieved.57

53. Id. (N[Lehman] proposed that it be allowed to become a bank holding company. . . . ButTimothy Geithner, then New York Fed president, now Treasury secretary, didn4t like the idea ofletting an investment bank become a bank holding company P so he said no.8); see also JonHilsenrath, Damian Paletta & Aaron Lucchetti, Goldman, Morgan Scrap Wall Street Model,Become Banks in Bid to Ride Out Crisis, WALL ST. J. (Sept. 22, 2008),http://www.wsj.com/articles/SB122202739111460721 (discussing how after Lehman, otherinvestment banks were later treated as banks). To be clear, we are not saying the bank resolutionregime is generally more lenient than Chapter 11. On the contrary, bank resolution compelsliquidation of the failing bank or SIFI and is widely seen as tougher. See David Skeel, The NewSynthesis of Bank Regulation and Bankruptcy in the Dodd-Frank Era 13 (Research Handbook onCorporate Bankruptcy Law, Barry Adler ed., Elgar Press, forthcoming 2015R2016) (on file withauthors) (NUnlike ordinary bank resolution, which permits the FDIC to reorganize a bank througha 6conservatorship,4 Title II provides only for receivership, which in bank resolutions under theFDI Act is nearly always used to liquidate the troubled bank.8). We are simply saying that, withregard to treatment of financial contracts, the bank resolution regime would have been moreprotective of value.54. See Roe & Adams, supra note 18, at 21. (NAlvarez & Marsal, Lehman4s restructuring

advisor, estimated that the disorderly close-outs of Lehman4s derivative portfolio caused theLehman estate to lose at least $50 billion in portfolio value, and maybe more.8).55. Hilsenrath, Paletta & Lucchetti, supra note 53. Dodd-Frank, in effect, now enacts this

change for all SIFIs.56. This view is taken by Morrison, Roe & Sontchi in their article, Rolling Back the Repo Safe

Harbors, supra note 1, at 1029R30.

[B]y permitting counterparties to Nrun8 on failing institutions . . . the safe harbors acceleratefailure and exacerbate the risk of systemic collapse. This is a lesson of the Lehman Brothersbankruptcy: during the days preceding and following the filing, counterparties refused toroll over repos (or demanded larger haircuts) and terminated other financial contracts enmasse, effectively draining Lehman of liquidity. Had Lehman not become so dependent onsafe-harbored reposPmore than one-third of its liabilities were said to be in repoPit mighthave been better positioned to weather the crisis long enough for a more stable solution toemerge.

Id. at 1030.

Others have argued that the safe harbors did limit contagion. Seth Grosshandler told Congress:

The effectiveness of the safe harbors in containing contagion was demonstrated duringthe bankruptcy of Lehman Brothers. None of Lehman Brothers4 counterparties (manyfinancial institutions among them) failed because of losses under Safe HarboredContracts with Lehman. Almost all counterparties exercised their safe-harbored rightsto terminate, net and exercise rights against collateral, with only approximately 3% of


The Lehman experience has led commentators to suggest thatbankruptcy is not a congenial place to restructure financial firms.58 Title IIof Dodd-Frank responds to this problem partially by extending bankinsolvency-type treatment to SIFIs. 59 This solves the problem for thoseinstitutions, but there is no guaranty that the relevant regulators haveidentified all such institutions. If a large financial, or nonfinancial,institution that the FDIC has not identified as a SIFI fails, it must file fortraditional bankruptcy and will be subject to the safe harbors. This meansthat for these shadow-SIFIs, Dodd-Frank provides no protection to thefinancial system. For example, the FDIC recently declared GE CapitalCorporation a SIFI. 60 The good news is that GE is now properlycharacterized. The bad news is that it existed as a mischaracterized entityfor a significant period. There are certainly others.

Thus, the problematic treatment of financial contracts in bankruptcyremains an issue for firms whose financial contracts may constitute animportant portion of their value. More troublingly, the failure of some ofthese institutions may have systemic implications.

II. IMPLEMENTING SYMMETRIC TREATMENT OFFINANCIAL CONTRACTSAfter Lehman, a number of commentators (including one of us) have

suggested that the bankruptcy approach to financial contracts ought to beadjusted to mirror the bank insolvency regime.61 In particular, a short staycould apply to the closeout of financial contracts. In this Part we argue that

Lehman4s derivatives book remaining outstanding after three months following itsbankruptcy petition. If these counterparties were not protected by the safe harbors, thesepositions would have been indefinitely frozen, causing potentially catastrophic capitaland liquidity implications for counterparties in addition to any losses under thecontracts.

Exploring Chapter 11 Reform: Corporate and Financial Institution Insolvencies; Treatment ofDerivatives, Hearing Before the H. Subcomm. on Regulatory Reform, Commercial & AntitrustLaw of the H. Comm. of the Judiciary, 113th Cong. 6 (2014) (statement of Seth Grosshandler).These two positions are not necessarily mutually exclusive. Certain financial contracts may meritspecial treatment, but immediate exercise of early termination rights may not bePor may not havebeenPthe best choice. See also Roe, supra note 15 (discussing risk amplification); Roe & Adamssupra note 18, at 25 (advocating for implementation of a ten-day stay in bankruptcy).57. Worse, because Lehman itself was a systemically important institution, the safe harbors

may have enhanced rather than limited systemic contagion, which is why Dodd-Frank created theOrderly Liquidation Authority for SIFIs. See Roe, Morrison & Sontchi, supra note 1, at 1029R30.58. See generally Roe & Adams, supra note 18 (discussing Lehman).59. The resolution rules are set forth in Title II of the Dodd-Frank Act, entitled Orderly

Liquidation Authority (OLA). See Dodd-Frank Act, Pub. L. No. 111R203, tit. II, 124 Stat. 1376,1442 (2010).60. There have been some encouraging developments in the FDIC4s recent focus on

designating new SIFIs. For example, recently GE Capital Corporation was declared a SIFI. SeeFIN. STABILITY OVERSIGHT COUNCIL, BASIS OF FSOC4S FINAL DETERMINATION REGARDINGGENERAL ELECTRIC CAPITALCORPORATION 1 (2013).61. See Janger, supra note 17, at 223.


such symmetric treatment could be implemented in a way that is bothsensitive to concerns about liquidity and allows for preservation of thevalue of a firm4s derivatives portfolio (including the risk managementfunction of any hedges). It might also facilitate the rescue of the firm bypreventing a tremendous cash drain at the outset of the case.62 Symmetrictreatment is not as simple as just extending the short stay regime frombanking law into the Bankruptcy Code, however. Questions remain abouthow to accomplish an orderly transfer in a short period of time, as well ashow to assure performance of contractual obligations during the stay andafter assumption and/or assignment. Thus, the remainder of this Article willdescribe the nuts and bolts required for implementation of a short stayregime in bankruptcy.

While the practical details may be complicated, the conceptual lynchpinthat anchors the enterprise is not: the debtor must provide the financialcontract counterparty with adequate assurance of performance.63When anycontract is assumed in bankruptcy, the debtor cannot claim the benefit ofthat contract without performing its obligations. Thus, for financialcontracts as well, the debtor must assure that the financial contract will beperformed (i.e., that the counterparty will receive the benefit of its bargain).This principle is symmetric with bank K0*/H'Q0Th4* -+/)QT)K/0*a 3LQ0 theFDIC stays early termination rights and transfers the contract, it also standsbehind the contract or ensures that somebody else will. In the absence of theFDIC or a solvent substitute, derivatives counterparties are legitimatelyconcerned that they will be left high and dry. Having invested in a financialcontract with a once-solvent party, they suddenly find themselves facingcredit risk.

Bankruptcy4s current method for protecting nondebtor parties tofinancial contracts, explained above, is one of self-help: the safe harborsgive the counterparties the right to insist on immediate payment as a way oflooking out for themselves. However, as also explained above, that is apotentially costly approach. Accordingly, so long as the debtor can assurethe counterparty the benefit of its bargainPas we will discuss below, eitherby assigning the contract to a solvent counterparty or by providing a creditenhancement from a creditworthy institutionPa better approach might be tosuspend early termination during a short stay pending assumption andassignment. If a derivatives counterparty can be provided with adequateassurance that the obligation under the derivative will be performed, there isno reason to grant it additional exit rights by allowing immediate closeoutnetting.

62. The debtor would still need to perform its obligations under the contracts as they came due,but it would be freed of the threat of early termination.63. As discussed below, care must be taken in identifying the contracts that are entitled to

special treatment, but analyzing the policy bases for singling out particular types of contracts forthat special treatment is beyond the scope of this Article.


The steps to achieving both market stability and value preservation are:(1) to define the class of contracts entitled to the special treatment; (2) toidentify the contracts entered into by the debtor that satisfy thosedefinitions; (3) to require that the obligations under the contract beperformed while the termination rights are temporarily suspended duringthe short stay; and (4) to ensure that adequate assurance of futureperformance is provided when the contracts are ultimately assumed and/orassigned. We address each step in turn.

A. CLEAR LEGISLATIVEDEFINITIONS OF !ELIGIBLE FINANCIALCONTRACTS"

In bank insolvency, all contracts receive the same treatment, namely, ashort stay of early termination and closeout netting, followed by suspensionof those rights for contracts that are assumed by the solvent transferee whocontinues to perform. To import this approach into bankruptcy, it isnecessary to decide which types of contracts should be entitled to thisspecial short-stay treatment. This is preferably a legislative, rather thanjudicial, question, and it must be asked with careful attention to scope andclarity. Much has been written elsewhere about the problematic definitionsof safe-harbored contracts under the current Bankruptcy Code. For example,the definition of Nsettlement payment,8 it has been argued, can be read toinclude the ordinary payments on the contract for the purchase of a bar andgrill (even if the payments are in nonpublic stock).64 In addition, the safeharbor O/+ Nsecurities contracts8 has been held to include the typedstatements of accounts provided to investors in the Madoff Ponzi scheme.65The broad, malleable definitions in current law can give sophisticatedparties the option to create bankruptcy-remote transactions wholly divorcedfrom the underlying justifications for the safe harbors.

This loose drafting has led to myriad recommendations to narrow thescope of the safe harbors.66 As a policy matter, we agree that the rationalefor exempting particular types of contracts ought to be based upon clearlyidentified and empirically grounded systemic-risk concerns that inhere inthe type of instrument or the nature of the parties to the contract.67More

64. In In re MacMenamin4s Grill, Ltd., 450 B.R. 414, 425 (Bankr. S.D.N.Y. 2011), JudgeDrain sought to exclude these payments from safe harbored treatment by noting that they werepayments to the ultimate beneficiary of a private transaction, not Nfinancial markets8 transactionswith systemic risk implications. After Enron and Madoff, however, it seems unlikely that this isstill good law, at least in the Second Circuit. See In re Bernard L. Madoff Inv. Sec. LLC, 773 F.3d411 (2d Cir. 2014); In re Enron Creditors Recovery Corp., 651 F.3d 329 (2d Cir. 2011).65. Madoff, 773 F.3d at 418.66. See generally Morrison, Roe & Sontchi, supra note 1 (critiquing safe harbors for repos

with volatile collateral); ABI COMMISSION REPORT, supra note 20.67. The World Bank recently adopted its best practice standard C10.4 to reflect this view.

WORLD BANK, PRINCIPLES FOR EFFECTIVE INSOLVENCY AND CREDITOR/DEBTOR RIGHTSSYSTEMS C10.4, at 21 (2015) [hereinafter WORLD BANK PRINCIPLES]. We applaud this move.


importantly, as a practical matter, and for reasons set out in the next Subpart,the transactions subject to special treatment must be easy to identify andcharacterize. This clarity is necessary not just for purposes of financialtransparency, but also because decisions about their treatment will have tobe made quickly during the pendency of the short stay. More broadly, thelist needs to be sufficiently stable to be relied upon by financial marketinvestors. Thus, our first step is to recommend, as a substantive requirement,)LQ Q*)lkHK*L2Q0) /O THQl+Hh SQOK0QS *Q) /O NQHKMKkHQ OK0l0TKlH T/0)+lT)*8subject to the special short-stay treatment in bankruptcy.

B. EXPEDITED JUDICIALASSESSMENT OF !ELIGIBLE FINANCIALCONTRACTS"

Eligibility for special treatment is a legislative judgment that turns onthe nature of the instrument and its effect on financial markets, not theintent of the parties. Parties put labels on contracts all the time to securefavorable bankruptcy treatment, but characterization of a contract by theparties as an Neligible financial contract8 does not necessarily make it so.68There must be some judicial opportunity to monitor compliance withwhatever classification is deployed. In the absence of a stay, there is nosuch opportunity, because any judicial review would be well after the fact.As Judge Peck fairly complained, for example, in Lehman, the closeout offinancial contracts happened immediately and effectively without judicialscrutiny because of the safe harbors.69 The first procedural requirement,therefore, is to give the bankruptcy court an opportunity to ensure thatcontracts are properly characterized as eligible for the shortened stay.

68. As we have noted, the class of safe harbored contracts may, under current law, beoverbroad, and without a doubt, the statute is not clearly drafted. Fixing these problems is beyondthe scope of this Article. Imposition of a short stay would have to satisfy a baseline resistance inbankruptcy to accord special treatment to creditors in violation of the system4s strong equalitynorms, but also confront the sense of entitlement current safe harbor creditors likely feel to avoidany stay at allPas soon as they can get their lawyer to file a motion. Compounding this difficultyis the collateral but essential question of properly defining the scope of which contracts areallowed this exceptional treatment. Current bankruptcy law is criticized as getting that cut wrongand so may need some modification. Whatever the optimal definition is, we know one thing thatwill not work: party self-declaration. See Darrell Duffie & David Skeel, A Dialogue on the Costsand Benefits of Automatic Stays for Derivatives and Repurchase Agreements 17R23 (Univ. of Pa.Law Sch.: Legal Scholarship Repository, Paper No. 386, 2012),http://scholarship.law.upenn.edu/cgi/viewcontent.cgi?article=1385&context=faculty_scholarship(discussing various theories on which financial contracts should and should not be subject to thesafe harbor provisions).69. See Hon. James M. Peck et al., The Long and Short of It M Financial Engineering Meets

Chapter 11, Eighty-fifth Annual Meeting of the National Conference of Bankruptcy Judges (Oct.14, 2011); see also Hon. James M. Peck, Bankruptcy Treatment of Financial Contracts: Lessonsfor Developing and Emerging Markets, World Bank Insolvency and Creditor/Debtor RegimesTask Force Meetings (Jan. 11, 2011)http://siteresources.worldbank.org/EXTGILD/Resources/WB_TF_2011_Bankruptcy_Treatment_of_Financial_Contracts.pdf.


This threshold requirement raises its own complications, however,because subjecting financial contracts to bankruptcy court jurisdictionmight itself have Nsystemic8 consequences. Any indication that abankruptcy judge might stay termination of a contractPfor whatever lengthof timePraises concerns about value.70 Contracts that clear automaticallyare priced differently (i.e., more favorably to the borrower) from contractswhere clearance may be delayed. Collateral also may be volatile, andcontracts may move in to or out of the money. If the debtor is allowed toNuse8 the collateral, that collateral might dissipate or at the very leastdeteriorate. Also, delay itself has costs. How much delay is too much andhow much uncertainty the markets can tolerate are difficult empiricalquestions.

Luckily, there is data. While we do not know how much time oruncertainty markets will tolerate, we do know that financial markets canand do handle the short, defined delay associated with bank resolution.Herein lies the simplicity of symmetric treatment. It does not ask marketparticipants to face an unknown risk. In other words, if the outer bounds ofthe delay are congruent with the short stay in bank resolution, there shouldbe no additional market disruption beyond what we have seen with banks.71Thus, bankruptcy can craft a solution to this problem by using the bankresolution approach as an outside limit. Just as the FDIC has a weekendplus one-business day to sort a bank4s assets into good and bad, form abridge bank, and find an appropriate assignee, so too would a bankruptcyjudge face the same constraint.72

The time horizon, however, is just one consideration. The second is therole of a jurist with discretion. Markets can more readily Nprice8 a fixedinterval of known duration than an indeterminate delay.73 Accordingly, thestay should be not just short, but nondiscretionary. That is, the stay must liftat the end of the defined period automatically, regardless of whether thefinancial contracts were transferred (unless, of course, within the defined

70. One popular derivatives handbook advises financial risk managers that securing safeharbor treatment is a top priority for handling counterparty risk. See PHILIP M. JOHNSON,DERIVATIVES: A MANAGER4S GUIDE TO THE WORLD4S MOST POWERFUL FINANCIALINSTRUMENTS 47 (1999).71. There is neither a fixed number of banks and SIFIs nor a static allocation of institutions

kQ)jQQ0 )LQ ]pZ!`=W# +QMK2Q l0S kl0I+(-)Th4* *lOQ Ll+k/+ +QMK2Qa 50SQ+ T(++Q0) Hljc K) K*uncertain whether a firm is a SIFI, and even if it is a SIFI, it is up to the FDIC to determinewhether it will be resolved in bankruptcy or under the OLA. We therefore fail to see how themarket would be adversely affected by extending the short stay regime to cover financial contractdebtors who use the bankruptcy system. Indeed, such symmetric treatment might prove cost-reducing in pricing contracts, ensuring that like instruments would receive the same insolvencytreatment regardless of counterparty.72. Recall that the one-business-day stay of the bank resolution process is nondiscretionary

and becomes effective immediately upon the appointment of a receiver. FDICIA, 12 U.S.C. §1821(e)(10)(B)(i) (2012).73. More precisely, pricing an indefinite delay is likely to be so complex that it would chill the

market.


period, the court declares the particular instruments as not properlycharacterized as Neligible financial contracts8). The court will not have a lotof time, and the stakes are high, but no higher than in bank resolution.Within the assigned period, the debtor and the court would need to identifyany mischaracterized contracts and accomplish the transfer to a solventcounterparty. However, seasoned bankruptcy practitioners and judges aremore than used to fast timeframes. Many cases are prepackaged, and fewbankruptcy cases arrive on the courthouse steps without significant advanceplanning. Thus, the second step of our proposal involves a short, fixed-Q+K/S fjLKTL 2l)TLQ* )LQ kl0I K0*/H'Q0Th +QMK2Q4* K0)Q+'lHe S(+K0M jLKTLthe financial contracts portfolio can both be adjudicated for properclassification and transferred to an appropriate assignee.

C. TIMELY PERFORMANCE OFOBLIGATIONS # SHORT-TERMLIQUIDITY

The symmetric approach strives to maintain market stabilitynotwithstanding bankruptcy. Therefore, counterparties must be assured that,as a practical matter, bankruptcy is not synonymous with nonperformance.The quid pro quo for nonenforcement of early termination or bankruptcydefault clauses is that the filing of bankruptcy will not lead to abrogation ofthe contract. To justify the suspension of early termination rights, the debtormust continue to perform its obligations under the financial contracts, justas is done in the bank and SIFI regimes. 74 Some financial contractscontemplate periodic payments, and some may close out by their own termsduring the suspension period. These ordinary course payments should beallowed to continue, even during the short stay, pending transfer.

Note that this treatment is not permitted for ordinary executorycontracts in bankruptcy; pre-petition debt is not paid post-petition unless thecontract is assumed.75 Failure to perform will not deprive the debtor of theability to cure any default and assume the contract.76 For financial contracts,however, such a limbo period, where the status of the contract is uncertainand no payments are being made,77 could be problematic, because such

74. This is true both in the bank insolvency regime and under the European Union CollateralDirective. See FIN. STABILITY BD., KEYATTRIBUTES, supra note 2, sec. 4.2 (NSubject to adequatesafeguards, entry into resolution and the exercise of any resolution powers should not triggerstatutory or contractual set-off rights, or constitute an event that entitles any counterparty of thefirm in resolution to exercise contractual acceleration or early termination rights provided thesubstantive obligations under the contract continue to be performed.8).75. 11 U.S.C. § 365(d) (2012).76. Id. § 365(b).77. N[The Bankruptcy] Code is silent on the rights and obligations of the parties to an

executory contract during the limbo periodPthat is, the period between the filing of the petitionand the time of assumption or rejection.8 In re Nat4l Steel Corp., 316 B.R. 287, 305 (Bankr. N.D.Ill. 2004) (quoting GEORGE M. TREISTER ET AL., FUNDAMENTALS OF BANKRUPTCY LAW 247 §5.04(e) (5th ed. 2004)).


uncertainty would be anathema to counterparties needing to know their cashpositions and exposures on a current basis. Symmetric treatment would thusrequire that the obligations under the contract be performed in the ordinarycourse, notwithstanding the shortening of the automatic stay.78

The harder question is where the debtor will get the liquidity to makethese ordinary course payments. Here, we think the bankruptcy regime hasrobust experience at incentivizing capital infusions to failing debtors,through section 364 of the Bankruptcy Code and its provisions for so-calledNDIP8 financing. The Code provides generous legal protections to a DIPlender, and debtors rarely file for bankruptcy without having identified asource of post-petition liquidity. There is no reason, at least conceptually,why a DIP lender could not, on the first day of the case, announce that itwas backstopping the debtor4s financial contracts. Instead of allowing earlytermination by the nondebtor counterparty, the Bankruptcy Code couldallow the debtor to perform its obligations in the ordinary course andrequire the nondebtor to accept that performance in the absence of amonetary breach. Indeed, it would be as if there were no breach of contractin the first place and hence no basis for termination.

During the short stay, while the identity of the assignee is uncertainand/or the assignment is still pending, the DIP facility could handle thedemands of ordinary course closeout of contracts, as well as the periodicpayments required under some swaps during the period prior to transfer.This may seem like a huge additional expense until one recognizes thatmost financial firms try to build a balanced derivatives portfolio. For manydebtors, the net exposure of the derivatives portfolio should be relativelysmall. This should also be true for nonfinancial firms that are using theirswaps or derivatives to hedge other risks in their businesses. For example,an airline will hedge the price of jet fuel, or a snack food company mighthedge the price of corn sweetener. Just as a firm may conclude that, onbalance, it is in the best interest of the business to pay critical vendors, itmay similarly conclude that it makes sense to continue managing thederivatives portfolio in the ordinary course. So, while the nominal (gross)exposure may seem quite large, so long as early termination rights arestayed, the daily swings should be manageable.

78. This treatment is not unusual in bankruptcy cases. Where a debtor seeks to preserve abusiness relationship, be it an executory contract (see 11 U.S.C. § 365), a supplier relationship(see In re Tropical Sportswear Int4l Corp., 320 B.R. 15, 20 (Bankr. M.D. Fla. 2005) (permittingpartial payment of pre-petition debt to a critical vendor)), or a credit facility (see In Re MichaelDay Enter., No. 09-55159, 2009 WL 7195491, at *7R8 (Bankr. N.D. Ohio Nov. 12, 2009)(permitting roll-up of lender4s pre-petition debt into post-petition DIP loan)), courts havegenerally allowed the debtor to cure defaults and perform obligations in a timely fashion, evenwhere this is not expressly authorized by statute. See In re Kmart Corp., 359 F.3d 866 (7th Cir.2004) (leaving open the possibility that a bankruptcy court may grant a critical vendor motionunder § 363(b)(1) of the Bankruptcy Code despite an apparent lack of express authority under §105(a)).


At first, memories of 2008 may make this idea seem whimsical. WhereLehman was involved, no bank, or even syndicate, was big enough toprovide financing.79 However, this may not always be the case. Indeed, afterDodd-Frank, the remaining entities using bankruptcy to reorganize should,by definition, not be systemically important. If they are systemicallysignificant, their failure should be dealt with under Dodd-Frank, andresolution under the OLA will be available as a backstop. Thus, unless therehas been an error in classification by the Treasury (hopefully a rareoccurrence),80 the DIP loan liquidity described above should not be beyondthe capacity of an ordinary lender. Therefore, and third, ordinary coursepayments should be permitted during the short stay.

D. ADEQUATEASSURANCE OF FUTURE PERFORMANCE #ACCEPTABLEASSIGNEES ANDCREDIT ENHANCEMENT

As mentioned above, the quid pro quo for temporarily suspending thecontractual right to terminate is ensuring that the nondebtor counterpartyreceives the benefit of its bargain. This raises a second, perhaps morecomplicated, issue: the need to identify a suitable transferee who is preparedand qualified to assume the debtor4s obligations on the contract. In the bankinsolvency regime, the FDIC simply sells the assets to another solventbank.81 In bankruptcy there is no agency to arrange and facilitate such atransfer. Thus, providing adequate assurance of future performance entailsat least two requirements: (1) identifying an acceptable transferee; and (2)facilitating the transfer, perhaps through the issuance of a sweetener orcredit enhancement.

1. Assignee CriteriaThe process of finding an appropriate and willing assignee of the

financial contracts that is acceptable to the nondebtor counterparty may notbe simple. Thus, in order to make a transfer work within a short timeframe,easily ascertainable criteria of assignee acceptability are a necessity. Thesecriteria might be stated in a pre-published list of acceptable counterpartiesor in terms of a minimum bond rating of the proposed assignee. Either way,the criteria would need to be dealt with in advance by legislation, regulation,

79. See generally STEVEN RATTNER, OVERHAUL: AN INSIDER4S ACCOUNT OF THE OBAMAADMINISTRATION4S EMERGENCY RESCUE OF THE AUTO INDUSTRY (2011) (addressing freeze ofDIP financing market during financial crisis).80. We recognize that we have earlier expressed concern over the accuracy in classifying

SIFIs, see supra, text accompanying note 60 (observing foot-dragging in recognizing GE Capitall* l 9Z]Zec k() jQ kQHKQ'Q SQk)/+* )Ll) l+Q N)// kKM )/ pZ<8 l+Q HKIQHh )/ kQ 9Z]Z* l* jQHHa81. See RESOLUTIONS HANDBOOK, supra note 9c l) @ fN3LQ0 l0 ]pZ!-insured financial

institution is about to fail, the FDIC takes immediate action to resolve it by selling the franchise ofthe failing institutionPK)* SQ-/*K)*c k+l0TL H/Tl)K/0*c l0S l**Q)*a8e.


contract, or perhaps even court rule, so that the eligibility of a transferee, tothe greatest extent possible, can be immediately determined.

2. Assignment # Credit EnhancementsOnce the pool of eligible assignees has been determined, it is still

necessary to find a willing purchaser. Finding a willing purchaser mayrequire financial enticement. Even if a willing assignee can be identified, itmight be only partially willing (i.e., unable or unwilling to take on all of therisk of the portfolio). Some forms of credit enhancement might therefore benecessary in order to give the portfolio risk attributes that are attractive tothe market.82

The key lies in the assurance of future performance. Indeed, when adebtor files for bankruptcy it chooses which commercial relationships toretain and which to abandon. If the relationship is, on balance, of value tothe estate, the debtor will elect to perform its obligations in order to obtainthe benefit of return performance. This is the logic of section 365 of theBankruptcy Code, which grants a debtor the option to pick and choose itsdesired executory contracts. The debtor is of course required to cure alldefaults before it can assume, and must also give assurance of futureperformance. This approach is similar to the one followed, as a practicalmatter, with regard to critical vendors, key employees, and others.83 Thereis no conceptual reason it could not similarly be applied to financialcontracts.

For these financial contracts, the lynchpin to performance is financing.One possible solution to this problem might be to construct a standby creditfacility to underwrite the performance of the transferee, funded by the DIPlender. As mentioned just above, DIP lenders operate as the source ofliquidity during bankruptcy. They approve expenses that are deemed to bein the estate4s best interest. When the debtor seeks to pay critical vendors,the DIP lender loans the money. When the debtor seeks to assume acontract, the DIP lender may lend the cure payments.84 Accordingly, just asthe DIP financing order can be used to guaranty liquidity during the periodprior to transfer, it might, in some circumstances, also provide a necessarycredit enhancement as a two-fold sweetener. First, the debtor-fundedenhancement will thicken the pool of putative assignees, who might see

82. Id. l) G@ fNAn optional shared loss [Purchase and Assumption] is a resolution transactionwhere the FDIC, as receiver, agrees to share losses on certain types of assets with the [AcquiringInstitution]. . . . During the most recent crisis, the FDIC has offered loss share where the[Acquiring Institution] accepts 20 percent of the losses, or more, depending on the bida8ea83. Some contracts, such as a contract to lend money, are not assumable, 11 U.S.C. §

365(c)(2), but that is not the issue with a repo, for example, where the money has already beenlent.84. See Kenneth M. Ayotte & Edward R. Morrison, Creditor Control and Conflict in Chapter

11, 1 J. LEGAL ANALYSIS CGGc CGC fF__?e fNWith respect to creditor control, several papers havedocumented the frequency of in-bankruptcy lines of credit (DIP financing) during the 1990s.8ea


some in-the-money potential of the portfolio but nonetheless remain skittishabout incurring the risk. Second, and perhaps more importantly, thefinancial backstop will assuage the contract counterparty that a new,unknown assignee will itself be able to perform.

Of course, in some cases, the purchaser/transferee of a debtor4sfinancial contracts will be sufficiently creditworthy to satisfy the hedgecounterparties by reputation alone. If not, however, then just as the DIPfinancing order might provide liquidity prior to transfer, the DIP lendermight find it worthwhile to provide a standby credit facility to ensure thatthe financial obligations of the contract will be covered by the transferee.Again, assuming a DIP lender who sees value in the continued operations ofthe debtor, the need for government intervention is unlikely for all but thevery largest institutions, which should ideally fall under the SIFI regimealready. Thus, and finally, the DIP lender might backstop adequateassurance of future performance, ensure the nondebtor counterparty thebenefit of its bargain, and eliminate the justification for early termination.

III. TRANSFER VERSUS ASSUMPTIONWhile the foregoing list of requirements sketches the basic contours of

how financial contract symmetry could be achieved in bankruptcy, animportant difference between bank insolvency and bankruptcy persists.Namely, in bank insolvency, the institution is resolved or liquidated.85 Theassets that can be sold are sold, hopefully in a way that preserves value, andthe assets that cannot be sold are resolved by the FDIC. In bankruptcy,however, the debtor may continue in business, perhaps in modified form,discharging its pre-petition liabilities pursuant to the plan of reorganizationand honoring its post-petition liabilities on a current basis.86 This creates asurvival possibility that does not exist with banks that never Nemerge8 fromFDIC resolution.

Accordingly, in bankruptcy, it may be in the creditor4s best interests fora debtor with a good businessPperhaps swept under by a liquiditycrunchPto continue its operations. When the business includes derivativesas investments or hedges, the debtor may wish to assume its derivative bookand continue to perform its obligations. To the extent that these derivativeswere being used as hedges against business risks that continue duringreorganization, the debtor may well want to continue that operational hedge.Again, an airline, for example, might wish to keep its jet fuel hedges inplace, or the snack food manufacturer may not wish to be exposed suddenlyto price fluctuations in corn. So long as the obligations continue to be

85. Compare the Bankruptcy Code4s Chapter 11 reorganization process, 11 U.S.C. § 109(b),with the compelled liquidation of FDICIA, 12 U.S.C. § 1821(m)R(n) (2012), the OrderlyLiquidation Authority, 12 U.S.C. § 5390, and 12 U.S.C. § 5394.86. See 11 U.S.C. § 1141.


performed, and the DIP lender stands behind the contracts, there seems tobe no reason to allow early termination; the debtor should be allowed toassume its financial contracts.87

CONCLUSIONThe modified bankruptcy regime contemplated above seeks to mirror

the bank insolvency regime with regard to quick, orderly transfer offinancial contracts to a solvent assignee or, in appropriate cases, assumptionby the debtor over the period of a short stay that suspends early terminationrights. Suspension of those rights, however, should not occur withoutadequate assurance of future performance. This can be provided either bythe creditworthiness of the transferee itself or by credit enhancements thatmay be implemented through the debtor4s DIP loan. Accordingly, thefollowing specific changes to the Bankruptcy Code are recommended:

i. First, a short stay should be added to the safe harbors.Instead of exempting financial contracts from theautomatic stay altogether, they should be subject to ashort stay that will lift automatically after a definedperiod, whether or not a transfer of the derivatives bookhas been accomplished.

ii. Second, the definition of Neligible financial contracts8should be clarified, both so that the systemic reason forspecial treatment is well understood and justified, andso that the covered contracts can be easily identifiedwhen challenged during the short stay period.

iii. Third, the bankruptcy court should be given the powerto deny short-stay treatment if an instrument is notproperly characterized as an Neligible financialcontract,8 but only if the determination is made withinthe short, fixed period.

iv. Fourth, bankruptcy management powers should beclarified to enable the debtor to make payments onfinancial contracts in the ordinary course. Anynecessary financing for liquidity to effect this couldcome from the DIP facility, repayment of which couldbe accorded the same, or even higher priority to theDIP loan. This backstop would assuage skittishfinancial counterparties.

87. One possibility might be to make obligations under financial contracts of equal or seniorpriority to the DIP loan. This, in essence, would mean that a debtor could not reorganize unlessthe DIP was prepared to stand behind the financial contracts. Debtors who complain that thiscould crush reorganization prospects by making DIP financing unattainable can be reminded thatthe alternative is unilateral early termination and closeout.


v. Fifth, section 365 of the Bankruptcy Code should allowfor the assumption of financial contracts, provided thatthe debtor continues to perform its obligations in atimely fashion and cures any non-ipso-facto defaults.

vi. Sixth, Nadequate assurance of future performance8provisions need to be clearly defined to more easilyidentify acceptable transferees for financial contracts.Bond ratings, pre-certification registers and the likecould be deployed as screening mechanisms here.Adequate assurance could be provided either by thetransferee itself or through a credit enhancementprovided by the DIP lender.88

These comparatively modest changes could implement the basicconcept of ensuring derivatives counterparties the benefits of their bargains,notwithstanding bankruptcy, in exchange for a short delay in their nettingrights. At the same time, these changes would recognize the need for specialtreatment of particular classes of financial contracts in the name of financialmarket stability. It is therefore essential that the category of safe-harboredinstruments be well defined, easily identifiable, and limited to financialinstruments whose importance to the financial system justifies the specialtreatment.

The debate surrounding the bankruptcy safe harbors for derivatives hasbeen heated. Some take the view that the bankruptcy safe harbors should berepealed wholesale. Others take the view that doing so would trigger afinancial Armageddon.89While we see the current incarnation of the safeharbors as anachronistic and poorly drafted, we have accepted, for thepurposes of argument, that certain financial instruments serve as moneysubstitutes or have other attributes that make their immediate clearanceessential to the financial markets. Whatever the importance of thatnecessary speed, however, financial markets currently tolerate short,defined delays in clearance where bank failures are involved. The shortdelay in the bank insolvency regime has allowed for the orderly transfer offinancial contract portfolios to solvent counterparties, thereby preservingthe value of those portfolios to the economy and the failing firm.

These observations are not unique to us, and they have generated anumber of proposals for the short stay to be adopted in bankruptcy.90Weagree, and have sought to take the next step, proposing how the BankruptcyCode could be changed to implement transfer or assumption during a shortstay. We borrow a page from the Dodd-Frank playbook, which implicitly

88. This might be too detailed for statutory treatment, so perhaps U.S. Trustee administrativeguidance could suffice.89. This debate is reviewed in Mokal, supra note 15.90. See, e.g., Roe & Adams, supra note 18.


recognizes the need for some stay assistance to protect SIFIs. But even forSIFIs, some additional legislation within the Bankruptcy Code may berequired (a topic tangential to the scope of this Article but worth a quickdetour). The FDIC appears to favor a so-called Nsingle point of entry8(SPOE) approach to reorganizing SIFIs in bankruptcy.91 In fact, a numberof bills are pending in Congress to help implement such an approach.92Under such a strategy, the breadth of the safe harbors may cause problems.The premise of SPOE is that a financial firm should be restructured byresolving the holding company in bankruptcy while leaving the varioussubsidiaries outside bankruptcy. Recapitalization of the firm is to beaccomplished through a bail-in of debt at the holding company level thatwould then provide needed liquidity to the subsidiaries. One assumption ofthe SPOE approach is that any financial contracts will be governed by theso-called International Swaps and Derivatives Association (ISDA)Resolution Stay Protocol. Under the Resolution Stay Protocol, all financialcontracts are subject to a short stay as a matter of contract. The key pointhere is that it is assumed that the subsidiaries would continue to perform allof their obligations, including their obligations under financial contracts,and that any transfer of the contracts to a bridge or trust entity would occurwithin the stay period, thus avoiding the early termination of any financialcontracts. The problem, however, is that the Bankruptcy Code4s definitionof safe-harbored contracts is not limited to derivatives that are subject to thestay protocol. It is, therefore, possible to imagine that the holding companymight be an obligor on safe harbored contracts, or that cross-defaultprovisions might trigger early termination rights that are not subject to thestay protocol. In either of these situations, an inability to handle thefinancial contracts in an orderly fashion might be catastrophic for theorderly recapitalization of the financial firm. Both bills currently pending inCongress appear to recognize this and would legislate a forty-eight hourstay, but this would apply only to covered financial institutions. Theselacunae provide yet another reason why the flexibility of a legislated shortstay, coupled with the possibility of assuming financial contracts, couldreduce rather than increase systemic risk, and we see little reason for

91. See Press Release, Fed. Deposit Ins. Corp., FDIC Board Releases Resolution Strategy forPublic Comment (December 10, 2013), https://www.fdic.gov/news/news/press/2013/pr13112.html.92. The House Judiciary Committee recently voted H.R. 2947, The Financial Institution

Bankruptcy Act of 2015, out of Committee, and a bill to create a special Chapter 14 for financialfirms is currently pending in the Senate. See H.R.2947 M Financial Institution Bankruptcy Act of2015, U.S. CONGRESS, https://www.congress.gov/bill/114th-congress/house-bill/2947/all-actions?q=%7B%22search%22%3A%5B%22bankruptcy+financial%22%5D%7D&resultIndex=1&overview=closed (last visited Mar. 6, 2016); S. 1861: Taxpayer Protection and ResponsibleResolution Act, U.S. CONGRESS, https://www.govtrack.us/congress/bills/113/s1861/text (lastvisited Mar. 6, 2016). Both bills propose a two-day stay on early termination rights along the linesdiscussed here. It should be noted, however, that these bills only apply to financial firms that areregulated by the Federal Reserve.


treating financial contracts held by financial institutions differently fromother enterprises.

In sum, and to restate one final time, our symmetric approach ispremised upon both continued performance, during the stay, of anyobligations under the financial contract and adequate assurance of futureperformance by the debtor upon assumption or transfer. Assuring, or evenpermitting, such performance may not be a simple statutory task. As apractical solution, we have suggested the DIP lender might be called on toprovide liquidity and credit enhancement where necessary. This treatment isnot, in the end, significantly different from the treatment of critical vendorsor other essential contracting parties well familiar in bankruptcy.93 In short,orderly transfer or assumption of financial contracts will be possible formany debtors, where transfer is feasible, and may, at the risk of ending on amelodramatic note, make the difference between life and death.

93. See, e.g., In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004).

implementing symmetric treatment of financial contracts in

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